2012 was a momentous year for company secretaries in Hong Kong. In the wake of the dragon’s passing, CSj assesses the implications going forward of the major corporate governance reforms and professional developments of last year. One thing is very clear, all compliance professionals in Hong Kong, company secretaries included, have a lot of homework to do.
The year of the dragon is supposed to be characterised by abundant good energy but last year’s dragon, if he is judged by GDP growth and economic activity, was a rather mellow fellow. In one area, however, the dragon lived up to his reputation – it was a bumper year for corporate regulation.
‘Bumper’ is perhaps something of an understatement. 2012 gave us the gargantuan new Companies Ordinance, published in August, which will significantly change Hong Kong’s compliance landscape in areas such as corporate reporting, directors’ duties, corporate administration and management of the AGM.
In any ordinary year, the Ordinance’s 900 sections and 11 schedules would have been quite enough to keep company secretaries busy, but the dragon had other surprises up his sleeve. In May the Securities and Futures Commission (SFC) published the Securities and Futures (Amendment) Ordinance 2012 – substantially expanding the existing framework for the disclosure of price-sensitive information by listed companies. 2012 also saw the introduction of Hong Kong’s new Competition Ordinance; new requirements on anti- money laundering and counter-terrorist financing; amendments to the Codes on Takeovers and Mergers and Share Repurchases; new rules on company announcements during share trading hours; and a substantial revision of the Corporate Governance Code and associated Listing Rules.
Quite a lot for busy company secretaries to be getting on with, even without considering the overseas legislation they need to keep tabs on. As a result of the financial crisis, the international community has been implementing what the SFC has called ‘the most radical financial reform proposals since the Great Depression’. Dodd-Frank, the UK Bribery Act, the Foreign Corrupt Practices Act (FCPA), the Foreign Accounts Tax Compliance Act (see ‘FATCA: the facts’ on page 12) and Basel III may have compliance implications for Hong Kong companies.
The new Companies Ordinance
The final draft of the long-awaited Companies Ordinance was published in August last year. Of all the pieces of legislation brought in during 2012, it will undoubtedly have the most impact on company secretaries. The sheer scale of the law is daunting and most of the reforms it ushers in will have relevance for company secretaries.
The reforms topping the compliance ‘to do’ list at the moment are the Ordinance’s corporate reporting provisions. Public companies, together with ‘larger’ private companies and guarantee companies, will be required to include an analytical and forward-looking Business Review in a Directors’ Report section in their annual reports. The Review must include information relating to environmental and employee matters that have a significant effect on the company (see Schedule 5 to the new Ordinance for more on this).
Further details of the required contents of the Directors’ Report are set out in the first phase of public consultation on the subsidiary legislation to be implemented this year as a precursor to the implementation of the new Companies Ordinance in 2014. The Companies (Directors’ Report) Regulation will require a directors’ report to include information on directors’ interests, donations made by the company and its subsidiary undertakings, reasons for the resignation of a director, and other matters.
Despite the fact that these provisions will not come into force until 2014, company secretaries would do well to prepare now for their implementation. That said, not all companies will need to comply since the new Companies Ordinance includes provisions designed to facilitate ‘small private companies’ to prepare simplified financial and directors’ reports. Company secretaries need to look at the detailed size and other criteria stipulated in the new Ordinance to see whether their company qualifies for this simplified reporting. Other relevant reforms implemented, or to be implemented, by the Companies Ordinance are set out below.
Deregulatory reforms relating to annual general meetings (AGMs). One of the primary goals of the Companies Ordinance rewrite exercise was to reduce, where possible, companies’ compliance burden. This is evident in a number of provisions relating to the AGM, for example enabling companies to dispense with AGMs by unanimous shareholders’ consent and hold general meetings at more than one location using electronic technology.
Deregulatory reforms relating to company administration. The Ordinance abolishes the memorandum of association and the concept of par value shares. Current provisions in a company’s memorandum of association will be regarded as part of the company’s articles, and existing balances in the share premium account and capital redemption reserve will become part of the company’s share capital.
Reforms relating to officers of the company. Several provisions of the new ordinance will have implications for company secretaries as officers of the company and may affect their personal liability. For example, the Ordinance lowers the threshold for prosecuting an officer of the company for a breach of various administrative requirements, such as a failure to file returns and documents on time with the Companies Registry.
Codification of directors duties of care, skill and diligence. Directors’ duties of care, skill and diligence have been codified, including both subjective and objective tests. Directors’ fiduciary duties remain uncodified and will continue to be defined by case law.
The second phase of public consultation on the subsidiary legislation to be implemented as a precursor to the implementation of the new Companies Ordinance closed last month. The consultation conclusions should be published in the first quarter of 2013 on the websites of the Financial Services and the Treasury Bureau (www.fstb. gov.hk/fsb) and the Companies Registry (www.cr.gov.hk).
The Securities and Futures (Amendment) Ordinance
A more immediate concern from a compliance perspective is the Securities and Futures (Amendment) Ordinance 2012 which was enacted in May last year and became effective at the beginning of this month. The Ordinance introduces a statutory regime which substantially expands the existing framework for the disclosure of price-sensitive information by companies listed on the Stock Exchange of Hong Kong. The new regime has been of particular interest to company secretaries both from a compliance perspective and because of the potential personal liability it imposes on company officers. These issues are dealt with in full in the following cover story (see pages 14–19).
Corporate Governance Code and Listing Rule changes
In addition to raising company secretaries’ work burden, the year of the dragon brought some significant benefits to members of the profession in Hong Kong. The changes to Hong Kong’s Corporate Governance Code and associated Listing Rules brought in by Hong Kong Exchanges and Clearing (HKEx) in April last year, saw the roles and responsibilities of company secretaries defined for the first time in regulation (see new Section F of the revised Code).
Equally significant for company secretaries’ standing in Hong Kong were the changes brought in relating to practitioners’ qualifications, experience and training. In particular, new Listing Rule 3.29 requiring company secretaries to undertake 15 hours’ professional training per year, which matches the Institute’s mandatory CPD requirement implemented in August 2011.
Some other changes may seem fairly minor but are likely to have a significant impact on the way the company secretary role is perceived. For example, the requirement for any board decision to appoint or dismiss the company secretary to be made at a physical board meeting rather than by written resolution and the provision that the company secretary should report to the chairman and/ or chief executive.
Many other revisions to the Code and associated Listing Rules will have implications for the company secretary’s advisory and compliance functions. For example:
- the board is now specified as being responsible for corporate governance and there is a new Listing Rule requiring the corporate governance policy and duties to be disclosed in the corporate governance report
- there is a new main board and GEM Listing Rule requiring one-third of the board to be INEDs
- the board is required to regularly review the contribution of directors and whether they are spending sufficient time on duties
- expanded Listing Rule 3.08 requires directors to take an active interest in the issuer’s affairs, obtain a general understanding of its business and follow up anything untoward that comes to their attention
- new Code provision A.6.6 requires directors to inform the issuer of any change to their significant commitments in a timely manner, and
- directors need to disclose in the corporate governance report details of how they complied with the code provision on training, which involves providing records of training they received.
The Competition Ordinance
In June last year, the Legislative Council enacted Hong Kong’s new Competition Ordinance (Cap 619). Competition compliance will be a new area for most members of the profession since this is Hong Kong’s first comprehensive competition law – it will apply to any company, listed or unlisted, so long as they are ‘engaged in economic activity’.
The Ordinance prohibits the making or giving effect to anti-competitive agreements, concerted practices or the decisions of a [trade] association ‘if the object or effect… is to prevent, restrict or distort competition in Hong Kong’. It also prohibits an undertaking with substantial market power [from] abusing such power by engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong.
These prohibitions are expected to come into force in late 2013 or 2014.
In his article on the new Ordinance (see pages 20–24 of this edition of CSj), Mark Williams, Professor of Law, Hong Kong Polytechnic University, urges company secretaries to take immediate action to ensure that they, and their boards, fully appreciate how these new prohibitions will affect the business of their companies.
The compliance challenge
It is too early to measure the success of the corporate governance reforms brought in last year, most of them are as yet untested. Moreover, in many cases, a fair degree of uncertainty remains as to how they will be implemented in practice.
The new PSI disclosure regime, for example, has raised a lot of concern in the market about the definition of ‘inside information’. The revised Securities and Futures Ordinance (SFO) does provide a definition of ‘inside information’ but it raises as many questions as it answers. Charles Grieve, Senior Director of Corporate Finance, SFC, pointed out in his presentation at the Institute’s Annual Corporate and Regulatory Update seminar in May last year that the uncertainty surrounding this definition is not the result of vague drafting. There are limits on how precise you can be when drafting rules on complex matters of corporate regulation – ‘It is going to be a judgement call’, he said.
The good news for companies somewhat daunted by this uncertainty is that the SFC has issued draft guidelines (effective this month) on the implementation of the statutory PSI disclosure regime. These guidelines include a list of examples of events and circumstances which may constitute inside information. Mr Grieve warned, however, that the list is ‘non- exhaustive and purely indicative’.
There are similar concerns in the market about the definition of ‘anti-competitive behaviour’ in the new competition ordinance. Price fixing, bid-rigging, market allocation or limiting production are fairly obviously anti-competitive, but are there routine business practices which will now be caught by the ordinance? As Professor Mark Williams points out, determining whether an adverse effect on competition has occurred in a market requires an assessment of the product or service concerned, the nature of the supply or distribution channel, the size and market share of the suppliers or customers, etc.
The new legislation and regulation brought in last year reinforces the point that regulatory compliance cannot be a routine box-ticking process – it requires considered and well-informed judgement. This, of course, is where company secretaries come in. As Edith Shih, HKCIS President, points out in this month’s President’s Message: ‘while legislation introduced last year has certainly increased the complexity and difficulty
of company secretarial practice in Hong Kong, it has also provided a timely reminder to companies of the value such professionals bring’.
The SFC guidelines on the implementation of the statutory PSI disclosure regime became effective at the beginning of this month and are available on the SFC website (www.sfc.hk). Since December 2012, the SFC has also been providing an informal consultation service on the new disclosure requirements.
SIDEBAR: Hong Kong’s governance scorecard
Company secretaries need to focus on the compliance implications of the new legislation and regulation brought in last year, but it is worth looking for a moment at the bigger picture. How effective will these new rules be? A law may start with its publication in the government Gazette, but its effectiveness is largely determined by what happens to it once it is unleashed on the market. How will it be perceived by the market? How effectively will it be implemented and enforced?
Moreover, where do these new laws and regulations place Hong Kong in the global corporate governance rankings? Global markets are increasingly compared on their corporate governance requirements – the rights of shareholders, equitable treatment of shareholders, disclosure and transparency, board responsibilities, etc – so where do we now stand in comparison with other major jurisdictions?
Over the course of 2013 and beyond, CSj will be tracking the major pieces of legislation and regulation brought in last year.
SIDEBAR: New rules: compliance homework for 2013
SIDEBAR: FATCA: the facts
Ensuring compliance with Hong Kong’s changing legislation is a tough call, but these days compliance professionals also need to keep on eye on international compliance developments. Companies anywhere in the world might be subject to the requirements of global regulatory bodies, such as the World Trade Organisation and the Basel Committee on Banking Supervision, or to the increasing number of domestic national laws with an extraterritorial reach, such as the UK Bribery Act and the Foreign Corrupt Practices Act (FCPA).
There is some doubt under international law as to the legality of national states imposing jurisdiction over organisations operating outside their national borders, but this has not stopped the US and the UK in particular from imposing ever wider international jurisdiction in such areas as anti-corruption and anti-tax evasion legislation.
The latest battleground in this latter area is the Foreign Account Tax Compliance Act (FATCA) – a new US law designed to combat tax evasion by US persons holding investments in offshore accounts. Enacted in 2010, FATCA will be subject to a phased implementation starting on 1 January 2014 and concluding in 2017. Under FATCA, US taxpayers holding financial assets that exceed certain thresholds outside the US must report those assets to the US Internal Revenue Service (IRS). In addition, FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest.
FATCA is highly controversial and there have been some doubts about its enforceability, particularly since it shifts the regulatory burden for anti-tax evasion onto international financial institutions. FATCA will mean that financial institutions in Hong Kong with financial accounts held by US taxpayers, or held by foreign entities with substantial US ownership, will be expected to enter into a special agreement with the IRS by 30 June 2013 under which they will be obligated to:
• undertake certain identification and due diligence procedures with respect to its account holders
• report annually to the IRS on its account holders who are US persons or foreign entities with substantial US ownership, and
• withhold and pay over to the IRS 30% of any payments of US source income, as well as gross proceeds from the sale of securities that generate US source income, made to foreign financial institutions not participating with FATCA, individual account holders failing to provide sufficient information to determine whether or not they are a US person, or foreign entity account holders failing to provide sufficient information about the identity of its substantial US owners.